Question

I have 1 done, but am unsure about 2 and 3

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual)	21,200	June (budget)	51,200
February (actual)	27,200	July (budget)	31,200
March (actual)	41,200	August (budget)	29,200
April (budget)	66,200	September (budget)	26,200
May (budget)	101,200

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $4.60 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	260,000
Rent	$	24,000
Salaries	$	118,000
Utilities	$	10,000
Insurance	$	3,600
Depreciation	$	20,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $19,000 in new equipment during May and $46,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $19,500 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$	80,000
Accounts receivable ($43,520 February sales; $527,360 March sales)		570,880
Inventory		121,808
Prepaid insurance		24,000
Property and equipment (net)		1,010,000
Total assets	$	1,806,688
Liabilities and Stockholders’ Equity
Accounts payable	$	106,000
Dividends payable		19,500
Common stock		920,000
Retained earnings		761,188
Total liabilities and stockholders’ equity	$	1,806,688

The company maintains a minimum cash balance of $56,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $56,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

1. a. A sales budget, by month and in total.

    b. A schedule of expected cash collections, by month and in total.

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

    d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $56,000.

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.

Answer 1

Answer a
Sales Budget
	April	May	June	Total
Sales in Units	66,200	101,200	51,200	218,600
Sp Per Unit	16	16	16	16
Total Sales in $	1,059,200	1,619,200	819,200	3,497,600
Answer b
Schedule of Expected Cash Collections from Sales
	April	May	June	Total
Collection from Accounts Receivables
Feb Sales	43,520			43,520
March Sales	461,440	65,920	-	527,360
April Sales	211,840	741,440	105,920	1,059,200
May Sales		323,840	1,133,440	1,457,280
June Sales Sales			163,840	163,840
Total cash Collections	716,800	1,131,200	1,403,200	3,251,200
Answer c
Merchandise Purchase Budget
	April	May	June	Total
Sales In units	66,200	101,200	51,200	218,600
Add: Closing Inventory in units	40,480	20,480	12,480	12,480
Total Needs	106,680	121,680	63,680	231,080
Less: opening Inventory in uints	(26,480)	(40,480)	(20,480)	26,480
Required Purchases in Units	80,200	81,200	43,200	257,560
Price per paid of Earings	4.60	4.60	4.60	4.60
Total Purchases in $	368,920	373,520	198,720	941,160
Answer d
Schedule of Cash payments to Suppliers
	April	May	June	Total
Cash Payment
Accounts Payable - March	106,000			106,000
April Purchases	184,460	184,460		368,920
May Purchases		186,760	186,760	373,520
June Purchases			99,360	99,360
Total Cash Payment to Suppliers	290,460	371,220	286,120	947,800
Answer e
Selling & Admn. Budget
	April	May	June	Total
Sales Comm. - 4%	42,368	64,768	32,768	139,904
Fixed
Advt.	260,000	260,000	260,000	780,000
Rent (Fixed)	24,000	24,000	24,000	72,000
Salary Expense	118,000	118,000	118,000	354,000
Utilities	10,000	10,000	10,000	30,000
Insurance	3,600	3,600	3,600	10,800
Dep.	20,000	20,000	20,000	60,000
Total	477,968	500,368	468,368	1,446,704
Schedule of Cash payments of Selling & Admn. Budget
	April	May	June	Total
Sales Comm. - 4%	42,368	64,768	32,768	139,904
Fixed
Advt.	260,000	260,000	260,000	780,000
Rent (Fixed)	24,000	24,000	24,000	72,000
Salary Expense	118,000	118,000	118,000	354,000
Utilities	10,000	10,000	10,000	30,000
Total	454,368	476,768	444,768	1,375,904
Cash budget
	April	May	June	Total
Opening cash Balance	80,000	56,472	320,684	80,000
Add: receipts
Collection from Customers	716,800	1,131,200	1,403,200	3,251,200
Total Cash available	796,800	1,187,672	1,723,884	3,331,200
Less: Disbursements
Cash Disbursement - Accounts Payable	290,460	371,220	286,120	947,800
Selling & Admn. Exp.	454,368	476,768	444,768	1,375,904
Purchase of Equipment	-	19,000	46,000	65,000
Dividend Paid	19,500	-	-	19,500
Total Disbursement	764,328	866,988	776,888	2,408,204
Cash Balance Closing	32,472	320,684	946,996	922,996
Add: Finance from Bank	24,000	-		24,000
Less: Payment to Bank	-		(24,000)	(24,000)
Less: Payment of interet - Bank loan	-		(720)	(720)
Net Cash Balance Closing	56,472	320,684	922,276	922,276
Income Statement
For the Qtr Ending June 30
Sales		3,497,600
Less: Variable Cost
Cost of Goods Sold	1,005,560
Sales Comm. - 4 % of Sales	139,904	1,145,464
Contribution		2,352,136
Less: Fixed Cost
Advt.	780,000
Rent (Fixed)	72,000
Salary Expense	354,000
Utilities	30,000
Insurance	10,800
Dep.	60,000	1,306,800
Operating Profit		1,045,336
Less: Interest Expenses		720
Net Income		1,044,616
Balance Sheet
As on June 30
Assets
Current Assets
Cash	922,276
Accounts receivables	817,280
Prepaid Insurance	13,200
Inventory	57,408	1,810,164
Fixed Assets
Property & Equipment	1,075,000
Less: Dep.	(60,000)	1,015,000
Total Assets		2,825,164
Liabilities
Accounts Payable	99,360
Dividends Payable	19,500
Total liabilities		118,860
Shareholders's Equity
Common Stock	920,000
Retained Earnings	1,786,304
Total Stockholders equity		2,706,304
Total liabilities & Stockholders' Equity		2,825,164		-
Schedule of Retained Earnings
As on June 30
Opening Balance		761,188
Add: net income		1,044,616
Less: Dividend declared		(19,500)
Closing Balance		1,786,304